Component 3: rewards and punishments

What happens if you get blacklisted? Or redlisted? The answer lies in the third and final component of the national SCS, a framework that regulators call “Unified Rewards and Punishments” 联合奖惩, sometimes translated as the Joint Punishments System. The framework is basically a series of legal agreements in which government agencies promise to enforce each other’s blacklists and redlists.

Here’s how it works:

When a government body includes someone on a blacklist (or redlist), a note of that is made in the target’s social credit record.

That credit record is circulated to all other government agencies via the National Credit Information Sharing Platform and the National Enterprise Credit Information Publicity System.

The blacklisted entity is then not only penalized by the agency who blacklisted them, but by all the other agencies, who each use their own powers to punish (or reward) the blacklisted party.

The goal here is to create an inescapable net through which, as President Xi Jinping put it, “everything is convenient for the trustworthy, and the untrustworthy are unable to move a single step”.

Put more simply, if a person or business has a bad credit record, they’ll be peppered with inconveniences and barriers at every turn. If they have a good credit record, everything gets a little easier for them.

Even more simply, get in trouble with one institution, and you get in trouble with all institutions.

This dragnet approach to credit enforcement assuages policymakers’ oft-raised concerns that the SCS won’t be effective unless the cost of bad credit is a serious enough deterrent, and the perks of good credit are a strong enough incentive, to inspire people and companies to self-regulate.

Practical Examples

This is probably best illustrated through example, so in this section, we’ll lay out how Unified Reward and Punishment plays out through the lens of a four key state agencies.

Example 1: Customs

One of the best-documented examples of Unified Rewards and Punishments in action comes from the General Administration of Customs (GAC), the state body responsible for regulating imports and exports. In mid-2018, several dozen state agencies signed on to help GAC punish: 1

That would include smugglers, import tax evaders, and others who violate customs regulations.

According to policy, GAC itself would punish offenders by:

Applying more frequent inspections of import and export goods

Undertaking examinations and verifications of import and export cargo documents

Strictly supervising over the import and processing of raw materials (which are then exported again after processing)

Raising import/export taxes

Other measures

Other agencies would then step in with their own punitive measures:

The Ministry of Public Security would not allow the legal representative of the offending company to leave the country.

The Supreme People’s Court would restrict the enterprise and its legal representative from purchasing real estate or land, and add them to the blacklist of those restricted from luxury consumption, which means they can’t purchase second-class or higher tickets on planes, trains, and boats.

The State Administration of Foreign Exchange would restrict the company’s foreign exchange quotas.

The company’s legal representatives, directors, supervisors, and senior managers would not be allowed to serve in leadership roles at either private or state-owned companies. If that person is already holding a leadership post at a state-owned company, they would be recommended for dismissal.

The company would be banned or restricted from participating in government procurement bids.

The company would be banned or restricted from issuing stocks and bonds.

The company would be banned or restricted from access to loans and financing.

The company would be ineligible to receive social security financing.

The company and its legal representative would be banned or restricted from the use of state-owned forest land, including forestry-related construction projects or grassland development projects.

The company would have a difficult time getting approval for science and tech projects.

The company would be banned or restricted from participating in state-owned property rights transactions, such as state-owned enterprise assets and state assets.

The company would be banned or restricted from establishing insurance companies or other finance-related entities.

The company would be ineligible to become the recipient of equity incentive plans.

The company would be the target of increased inspections or restricted approvals in the food and drug industry.

The company would be banned or restricted from the production, operation and storage of dangerous chemicals, production and operation of fireworks and firecrackers, mine production, safety evaluation, and other industries where public safety is a concern.

Ouch.

These penalties don’t last forever, but they would be in effect as long as the enterprise remained in Customs’ bad graces. The policy does indicate that a timeframe should be set for lifting restrictions, but that timeframe isn’t specified.

It also works the other way around. For those companies that land on the GAC redlist (海关高级认证企业), GAC issues its own rewards, including:

Other state agencies and associations then step in to offer a whole lot of other perks:

Unified Rewards for Companies Redlisted by Customs

Agency

Rewards offered

National Development and Reform Commission

Fast-tracked administrative examinations and approvals. Where a company doesn’t have supporting documents prepared, approvals will be issued first, and documents can be submitted later

Priority consideration in the application for special funds allocated for government infrastructure projects

Better import and export quotas, and faster quota determination, for the import and export of goods such as grain and cotton

Priority in electricity directly purchased from power generators

More rapid processing of overseas bond issuance. Companies on Customs’ readlist will trial a simplified approval by which they can get a bond issuance quota which they can decide when and how to use later

Fast-tracked issuance of import and export certificates to support the company when bidding for government-funded projects

Implications for companies doing business in China

Though the benefits for redlisting are significant, the system as a whole is still more focused on punishments, rather than rewards. That being the case, resources should be directed at avoiding blacklists rather than chasing redlists. Still, it’s a good idea to invest in understanding the redlists applicable to your sector, so that when the opportunity arises, you can take advantage of low-hanging fruit that might secure a competitive advantage.

Example 2: Ministry of Ecology and Environment (MEE)

As you might have guessed, the MEE is responsible for overseeing environmental issues. That includes conducting inspections on emissions and pollution. Like other agencies, the MEE keeps its own blacklists on those who violate environmental regulations or endanger ecology. If your Chinese is up to it, here’s an example of a 2017 blacklist released by the Guangzhou MEE branch office.2

Through the Unified Rewards and Punishments framework, getting blacklisted by the MEE triggers a similar set of restrictions as getting in trouble with GAC does, but regional MEE branch offices are toying with other mechanisms to punish polluters.

For example, in Jiangsu province, the MEE is working with State Grid to increase electricity rates for enterprises whose credit files contain records of environmental protection violations: 3

Violators are segmented into two categories by severity: fairly serious (red-level) violations and very serious (black-level) violations

Example 3: Civil Aviation Administration of China (CAAC)

Much ado has been made about China’s no-fly list. The list is managed by the CAAC, which has the power to add passengers who do dangerous or illegal things in airports or on planes. According to policy, behaviors that might land you on the list include:4

Forcibly occupying or interfering with aircraft, forcibly entering or striking the cockpit or runway

Obstructing or inciting others to obstruct aircrew, security inspectors, check-in personnel, and other civil aviation personnel from performing their duties, or committing or threatening to carry out personal attacks

What this basically means is that if an individual is a legal representative or holds a leadership post at a company that has been classified as untrustworthy by any of those seven ministries, they are at risk of being placed on the no-fly list.

Example 4: Cyberspace Administration of China (CAC)

A July 2019 policy released by the CAC states that individuals and companies whose online behavior is in violation of existing cyberspace laws will be placed on a blacklist for a period of three years. Individuals and companies will be blacklisted if: 5

They own a website that has been shut down or have had their internet operation license revoked due to violation of internet content laws

They’ve been otherwise penalized [by internet authorities] but failed to perform the penalty

They disseminated information that violates “social morality, business ethics, honesty, and integrity”, or if they intentionally provided technology, equipment, or information services for the same purpose

As with the other examples, inclusion on the CAC blacklist has the potential to impact business operations and personal freedom in a wide variety of ways.

Since censorship is such a hot topic, a quick note here: it’s important to understand that these censorship regulations were in place long before the SCS was. So, this is an example of social credit being used to enforce existing laws, rather than creating a new type of online censorship.

Implications for companies doing business in China

Through the Unified Rewards and Punishments system, a violation in one area has the potential to proliferate into a cascade of consequences that span the length and breadth of business operations, a scenario that could very quickly turn into an operational nightmare.

Because the system enormously expands corporate vulnerability, it’s imperative that companies proactively manage their credit records, allocate resources to compliance, and invest in understanding the blacklists that apply to their sector.